UOB: Buy the Australian dollar at the bottom for recovery later this year

Accumulate the Australian dollar at the lower end of its likely US$0.77 to US$0.79 trading range, with the currency set to strengthen ahead, UOB said in a note last week.

“We are still of the view that a synchronized global upswing (Goldilocks scenario) remains intact, keeping commodity prices well supported, UOB said. “As such, commodity-related currencies such as the Australian dollar should benefit.”

The bank also noted that the Aussie dollar’s correlation with U.S. stocks has picked up, and recovering equities with buoyant risk sentiment should help support the Aussie.

“That said, the dual headwind of negative rate spreads and falling iron ore prices is likely to cap the AUD/USD below 0.80 over the near term,” it said.

UOB noted that in February, the yield on the 10-year Australian government bonds fell below equivalent U.S. Treasury yields for the first time in around 18 years, and has since then, the yield spread has slipped even further into negative territory. But the pair didn’t weaken as would be expected, UOB noted.

Additionally, even though the Trump administration’s announcement of tariffs on steel and aluminum sent the price of key Australian export iron ore sharply lower, the Aussie dollar broke with the usual trade correlation and rallied instead, UOB noted.

UOB forecast the AUD/USD pair would be rangebound between 0.77-0.79 for the second quarter of this year, but it expected an eventual recovery toward 0.83 by the end of 2018.

“Likewise for AUD/SGD, one can make use of near term Singapore dollar strength ahead of the Monetary Authority of Singapore meeting in April to accumulate AUD/SGD just above parity,” UOB said. “This coincides with our view of limited downside in USD/SGD below 1.30.”

UOB forecast the Aussie dollar to Singapore dollar pair would recover toward 1.10 by the end of the year. j

In late Friday Asia trade, the Australian dollar was fetching around US$0.7728 and S$1.016.

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